Deciphering the Federal Budget

President Trump spoke about his budget plan in his wide ranging address to Congress last month. However, it is rare that Congress actually passes a budget (the last time was in 2015, and that was the first time in six years) and rarer still that the presidential framework made it through the process.

So, let’s take a look at what was proposed, where it falls apart, and then what the process actually involves. Go get a cup of coffee, you’re going to need it.

First, the good news. Appropriations come from Congress, not from the Executive branch.  Per the Origination clause in the Constitution, all appropriations bills must start in the House, although the Senate may concur and/or offer amendments. In real life, normally this leads to negotiations between the Chambers prior to anything being enacted. Thus, nothing is happening quickly. That means there is time to lobby your reps for things that matter to you.

Next, the massive increase in military spending. It’s pretty obvious from what Trump says about this being a “Nationalistic” budget and how we need to win wars, that he’s committed to getting a lot of Americans killed for no reason. To get the money through Congress would be a hard slog as we are a war-weary nation. Further, it would require 60 votes in the Senate (think: 8 Democrats) to remove the existing cap, and legislation to work around sequestration.  However, and this is the scary part, there is something called “overseas contingency operations” spending.  That’s how they fund war. And it is, de facto, a black hole of your tax dollars that don’t get accounted for in the budget. It’s a backdoor into funneling money to defense without having to deal with the caps.

But assuming that the increased defense funding would come via the budget process, there is still the need to make cuts to stay within the requirements of sequestration, and to go with the “spend a dollar, cut a dollar” logic that avoids ballooning the deficit.

So where does money go from the Federal budget? A great source for information is the National Priorities Project, which not only tracks this information, but provides a great deal of background to help people understand the process.

The budget  is divided into three parts: mandatory spending, discretionary spending, and interest on the debt. Approximately 65% is mandatory spending: While the Bannon Administration can make some cuts, today’s promise is that Social Security, Medicare and Medicaid will remain untouched, and assuming that Veteran’s Affairs will likewise be left alone means that only about 8% of the mandatory part of the budget can be touched, and that would encompass food, agriculture, transportation and “other.”  Likewise, it would be pure insanity to refuse to cover interest on the debt.

Source: National Priorities Project. Reprinted with permission.

So let’s take a look at discretionary spending, from whence the cuts would come. The chart on the left shows the 2015 numbers, the last year for which data is available.

The number for the military is about $54 billion.  The likeliest target is that orange “Government” pie piece in the lower part of the chart.  Cutting that pie piece will mean firing a lot of government workers. Will the administration really want to raise unemployment? Further, a lot of the money from Government, Education, Housing and Community, Energy and Environment, etc., goes to big companies with government contracts. Will they be willing to throw all those people out of work also?

You may be wondering how some things are both Mandatory and Discretionary spending. Take Social Security. The monies paid to recipients are mandatory, the employees that process those checks and do the rest of the work are considered discretionary. It will be difficult to keep the program operational if there is no one to run it.

President Trump spoke about cuts to the federal budget and criticized adding to the federal debt. Interesting factoid on that:

March 15 of 2017 will be a crucial data for all Americans on the planet. On this day, the debt ceiling “holiday” put together by Obama and Boehner expires. Moreover, the debt ceiling will freeze at US$20 trillion, which is the same number it is at today. From that point forward, no more debt can be created by the US economy. Considering the country burns through US$75bn worth of cash every month, the US may find itself out of tangible money by the Summer of 2017. Although it is unclear if this will happen, it is a rather troublesome idea. Source

Source: National Priorities Project. Reprinted with permission.

Another leg to this stool is where the money comes from that funds the Federal government. Yes, taxes is part of it, but what’s interesting is how much more money comes from individual taxpayers compared to corporations. People say that they pay too much in taxes, but most people pay a far lower rate for Federal taxes than they think they do. Honest. It’s the math. But you can see all income sources in the chart on the right.

Listen carefully when President Trump talks about the need to cut taxes: every plan I’ve seen from the GOP has included cuts for corporations (who are currently taxed at an effective rate about 10 – 15% of what they paid back in the 1950’s and 60’s when our economy was growing at a much faster rate than it is now) and the very wealthy, who also pay far less than they used to pay, viz effective rates.

One thing that Trump has mentioned is the “simplification” of the tax code, which would mean doing away with many tax breaks. One of the largest would be the home mortgage deduction. Think what that might do to the housing market. Hmm. The flat tax would, greatly extolled by failed presidential candidate Steve Forbes, mean that people would pay a flat percentage of their income. No deductions, no exemptions, but at a supposedly lower effective rate than people are paying now. Don’t believe it. The only way to keep this revenue neutral would be a VAT system, where taxes are paid at every step of a purchase from raw material to what is bought at the store.

As a final note, the speech to Congress is a Constitutional requirement. In most years, it’s called “The State of the Union” address, but when a president is in his first year, it’s called an address because normally the State of the Union looks back on the prior year, which is the previous administration. (Article II, Section 3, Clause 1.)

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